pasquale tridico dept. of economics - university roma tre, economia della crescita e del capitale...
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Pasquale TridicoDept. of Economics - University Roma Tre,
Economia della Crescita e del Capitale Umano,
Main articlesAcemouglu et al., 2001Rodrik et al., 2004
Acemouglu et al., 2001Differences in European mortality rates to estimate
the effect of institutions on economic performance. Europeans adopted very different colonization
policies in different colonies, with different associated institutions.
In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions.
These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, to estimate large effects of institutions on income per capita.
The Acemouglu model
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income
institutionstrade
geographyexogenous
partlyendogenous
endogenous endowments productivity
Central question of development economics: which are the most important arrows and why?
The recent debate on institutionsThere has been burgeoning literature within economics
that discusses and analyses institutions (see North 1990; Nugent and Lin 1996; Nelson and Winter 1982; Jones and Hall 1998; Olson et al. 1998; Robinson et al. 2001; Glaeser et al. 2004; Bardhan 2005; Hodgson, 2007). Acemouglu et al., 2001 Rodrik et al., 2004
The attention of international organisations and policy makers has focused more on the importance of institutions for economic growth. Institutional economists, economic research centres and international organisations have built indexes of governance which measure an institutional quality of developing and advanced countries.
Institutions and developmentThe importance of institutions in the economy
and on the economic development is recognized from nearly all the economists who worked on LDCs (Lewis, 1955; Myrdal 1968; Kutznets 1973; Sen 1981; Hirschman, 1990; Solow 1994).
However the institutional economics remains too much often outside from the analysis of the neoclassical economic paradigm and from the greater part of the text books, where the neoclassical assumptions (perfect information, zero costs of transaction, profit maximizing etc) prevents whichever debate on the role of institutions in the economics.
Endogenous growth theoryAlso the recent contributions of the
endogenous growth theory (Romer 1986, Lucas 1988), take into consideration elements (such as increasing return to scale, human capital, externalities) whose origins it is not difficult to make to go back to the economic relations that are settled down between the agents, and therefore to the institutions.
SOLOW RESIDUAL (1956)
Y- rK /Y *K - wL /Y *L= SOLOW RESIDUAL= TFP
SOLOW RESIDUAL IS A BLACK BOX WHICH CAN BE EXPLAINED WITH INSTITUTIONS
Questions concerning institutions roleThe role of the institutions in the
economy;Existence of different institutions; The contribution of institutions on the
productivity; The existence of inefficient institutions; The mechanisms of the institutional
change
Things we should have a look atReligion (religiousness)?Cultural issues?Freedom?Anything else…
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Religion and religiousnessReligion and Economic Growth Across
Countries (Barro & McLeary)Motivations of the study:
previous studies neglect the influence of culture
need for incorporation of social and political variables
investigated the effects of church attendance and religious beliefs on economic growth
Also in Europe: east orthodoxy vs west catholic/protestant
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Religion and religiousnessTheoretical foundations
Secularization hypothesisMarket or supply side forces hypothesis
greater state regulation of religion may decrease the efficiency
Data: World Value Survey, Gallup Millenium Survey, International Social Survey Programme
Findings:For given religous belief, increases in church
attendance tend to lower growth15
Cultural issuesThe theory of human development: A
cross-cultural analysis (C. Welzel, R. Inglehart, H-D. Klingemann)
FoundationsSocioeconomic development,
emancipative value change and democratization
Emancipative values linked to people’s available resources
Effective democracy linked to emancipative mass values
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Freedom? Individuals have economic freedom when:
property is protectedno arrangements that restrain the realization of gains
from economic activitiesSources of data:
Heritage Foundation/Wall street Journal (10 elements)Fraser Institute (17 elements)
Issues to be addressed:Lack of sensitivity analysisLink between economic freedom and economic growth
depends on the measure usedNo studies found that economic freedom does not
influence growth
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QuestionsPeople say “： institutions matter.”
Great!
But, if institutions are nothing more than codified laws,
organizations and other such explicit, intentional devices,
why can’t badly-performing economies design (emulate)
“good” institutions and implement them?
because they do not change so easily ...and they are
informal…
How do institutions change?
“history matters” for development.
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Institutions: a difficult definitionMoreover the definition of institution and
the effects that them can cause on development are not equally shared by economists.
The same definition of economic institutions is often contrasting and it varies according to the various schools of economic thoughts and the various theoretical approaches.
Old Institutional Economy1. The Old Institutional Economy (OIE) rejects the
concept of a rational individual (methodological individualism) who maximises his own benefit and emphasises the role of the habits, behavioural rules and social rules as the basis of the human action. The OIE develops an alternative concept of economic behaviour that finds its own origins in the institutions. The institutions are the rules according to which enterprises and consumers “satisfy” and not “maximise” respectively their own return and utility. For this institutional approach of economics “institutions matter.” The institutions are not necessarily created to be socially and economically efficient; conversely they are created to serve and to preserve the interests of some social clusters and to create new rules. Institutions, therefore, can be said to be efficient as long as they are committed to their original aims.
New Institutional Economics2. The second approach is the New Institutional
Economics (NEI). Libecap (1998) claims that “the new institutional economics retains its general attachment to neoclassical economics with its emphasis on individual maximization and marginal analysis, but with attention to transaction costs, information problems, and bounded rationality” According to North “the institutions (...) represent the way through which economies face the Market failures.” Nevertheless, North rejects the assumption of efficient institution and he highlights the vital role of power clusters and lobbies upon the institutional agreements. The most important role of Institutions is that of reducing the uncertainty in order to determine a steady framework of social relations.
the neoclassical theory3. Finally, in the pure paradigm of the
neoclassical theory there is no allocation mechanism different than the market. The only institution admitted is the market where the price is determined. This allocation does not involves equity, norms or behaviour, cultural differences and the institutions are exogenously given, i.e. they are not involved in the economic analysis. In the neoclassical theory with perfect information the allocation is price-guided, the transaction cost is zero. Hence, the institutions (apart from the market) are not useful, instead they inhibit the economic performance.
CENTRAL DILEMMA The main problem in the institutional
economic analysis is to establish what is the fundamental paradigm of the economic choices between the two:
1. INSTITUTIONS PREFERENCES MAXIMIZATION CHOICES
2. INSTITUTIONS CHOICES
NEI and OIEThe NEI seems to be oriented towards the 1°
paradigm, on the contrary the OIE towards the 2°. In the 1° case the neoclassical approach, although
revised, can still work, through the introduction of transaction costs that eliminate negative externalities (Coase 1937).
On the contrary, in 2° the case, economic institutions are rules and behavioral patters that not only create the preferences but also abolish the maximizing mechanism, replacing it with a model where agents are not guided by prices but their actions are determined by institutions (Matzner 1993).
Transaction Costs
Transaction costs are the costs to make an exchange, to transfer the propriety, to start an activity, to protect one’s own business, to gather information, to change or to preserve the actual institutional framework, etc.
Transaction costs, certainly, do not involve only the financial expenses but also time and all resources required to pursuit goals.
These resources could be private or public resources and their measure is not only in economic terms but as well in social terms.
NEI position on institutional changeThe theory of the institutional change in
the NEI is based on a fundamental assumption: the institutions reduce the costs of transaction, and the agents would use the institutions in order to diminish the costs of transaction (North 1990).
The firms react to the change of the relative prices modifying their productive methods. To the new prices and with the new techniques, old institutions could not be longer suitable to diminish the costs of transaction (North 1990), therefore the institutions will change.
Formal institutionsFormal institutions are generally defined as the
law sphere, with constitutions, regulations and organisations. There is a direct connection between formal rules and a political economy framework such as governance, property rights, and judiciary system. Thus, reinforcing of the formal institutions is guaranteed by the legal system.
Informal institutionsThey are a set of social norms, conventions, moral values,
religious beliefs, traditions and other behavioural norms that have passed the test of the historical time and that determine the individual behaviour.
The informal institutions can be called the Old Ethos or the Carriers of History. These informal rules are part of the dynamic evolution of a community and heritage of its culture. In addition these rules or institutions are self-reinforcing in course of time trough mechanisms such as imitations, traditions and other forms of teaching.
They also serve as sanctions that facilitate the self-reinforcing process such as: community membership, fear of expulsion, reputation and fear to be the only one not to respect the rules.
There is an inbuilt threat in this Hobbesian type Competition which allows the respect of the rules because otherwise the social relationships will become violent.(Solow R.. 1994)
A normative systemThis highlights the complexity of a normative
system that is characterized by one formal dimension and one informal dimension, each with the own characteristic
Hence, Institutions are “a set of social rules that structure social interactions” (Knight, 1992:2)
A complex framework Formal rules Informal rules Conformity Legal sanctions Social obligation Reinforcing Legal incentives Reputation Motivation Functionality Orthodoxy
Prevalence Tools Law,
organizations, constitutions
Tacite conventions, social normes, habits
Legitimacy Judicial- state Cultural-traditional
Formal/informalHence it is needed to overcome the
distinction between formal institutions and informal ones. Otherwise will prevail a misleading idea, on the effective state of the institutions, whereas there is a change of formal rules with a persistence of previous behavioral patterns (or vice versa) (examples abound ...). Both Formal and informal Institutions can determine the behavior of the agents and of the organizations in pursuit their aims.
What is an “institution” then?
Arrangements that coordinate the behavior of individuals in society.
Institutions are sets of regulatory norms.
An institution is a stable, valued, recurring pattern of behavior.
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Where do we see “institutions”?
1. Is family an institution?
2. Friendship?3. Love?4. Marriage?5. School?6. Exam?7. Market?8. Firm?9. Contract?10. Polls (voting)
11. Political party?12. Constitution?13. Exchange rate regime?14. Central bank
independence?15. Currency?16. Theatre?17. Literature?18. Cinema?19. Cinematography?20. Poverty?21. Social stratification?22. Casta system in India?
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ONLY IF…An institution is a stable, valued, recurring pattern of behavior.
Example of category of economic institutions Trust Information Property rights and Privatizations Rent-seeking, Groups of pressure and
lobbies Bribe/corruptionReputation and Values Mechanisms of selection, Competition and cooperation Intermediary BureaucracyOrganizations Laws and constitutions Industrial relations
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There has to be reciprocity
The important conclusion Social agents
generate, influence and support institutions.
BUT
Institutions create social agents.
A good institution must survive a dual test of “making sense” and “being fit” for its mission.
State and Market
A concept that must be clarified is that the economic institutions are not external ties that hinder economic growth and do not refer to a contraposition between State and Market.
They are on the contrary the mechanism of operation of the economic processes, the modalities of realization of the exchanges (Fadda 1999, p.98).
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a. Markets are not self-creatingi. Property rightsii. Contract enforcement
b. Markets are not self-regulatingi. Regulatory authoritiesii. Correction of market and coordination failures
c. Markets are not self-stabilizingi. Monetary, fiscal and currency arrangements
d. Markets are not self-legitimatingi. Political democracyii. Social insuranceiii. Redistribution
Long term economic development forces (Maddison 1995)
institutions natural resources demographic development labor supply human capital technological progress structural Changes (consumption, occupation,
parity, agriculture etc) international Commerce, channels and international ways of
communication
Different "style of Capitalism"Appropriated economic
institutions equal for all countries do not exist, but every country has is own "style of Capitalism" (Rodrik 1999)
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2000: “Augmented” Washington Consensus the previous 10 items, plus:
1. Fiscal discipline2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rates6. Trade liberalization7. Openness to FDI8. Privatization9. Deregulation10.Secure Property Rights
11. Corporate governance 12. Anti-corruption13. Flexible labor markets14. WTO agreements15. Financial codes and standards16. “Prudent” capital-account opening 17. Non-intermediate exchange rate regimes18. Independent central banks/inflation targeting19. Social safety nets20. Targeted poverty reduction
1989: Original Washington Consensus
Disappointments of the Washington Consensus
Latin America: Only 3 countries have grown faster during the 1990s than in the 1950-80 period (and one of those 3 was Argentina!)
Countries in transition: Real output below 1990 levels in all but four former socialist economies; poverty rates higher
Sub-Saharan Africa: Results remain very disappointing, and far worse than those obtained prior to the late 1970s
Widening income gaps:
Frequent and painful financial crises: Mexico, East Asia, Brazil, Russia, Argentina, Turkey.
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42
income
institutionstrade
geographyexogenous
partlyendogenous
endogenous endowments productivity
Central question of development economics: which are the most important arrows and why?
43
income
institutionstrade
geography
endowments productivity
1, 2
4
3
1: natural resources; soil quality
2: public health
3: colonialism, wars, migrations
4: resource curse
44
income
institutionstrade
geography
endowments productivity
Integration convergence
45
income
institutionstrade
geography
endowments productivity
One kind versus many?
Where do they come from?
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log yi = µ + α INSi + β INTi + γ GEOi + ε i (1)
INSi = + INTi + ψ GEOi + v INSi (2)
INTi = + INSi + ω GEOi + v INTi (3)
Some seminal workFrankel and Romer (1999)Hall and Jones (1999)Acemoglu, Johnson, Robinson (2001)Dollar and Kraay (2002)Alcala and Ciccone (2002)Easterly and Levine (2002)
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48
theoretical concept
empirical proxy instrument
geography distance from equator, mean temperature, etc.
--
integration trade/GDP ratio predicted trade share constructed from a bilateral gravity equation (Frankel and Romer, 1999)
institutional quality
survey of investor perceptions regarding protection of property rights, rule of law, etc.
mortality rates among 19th century European settlers (Acemoglu et al., 2001)
49
Lo
g R
ea
l GD
P p
er
cap
ita in
19
95
(e) Log Openness
Log Real GDP per capita in 1995 Linear prediction
2.55341 5.77982
5.77144
10.4544
AGO
ALB
ARG
AUS AUT
BDI
BEL
BENBFA
BGD
BGR
BHR
BHS
BLZ
BOL
BRA
BRB
BWA
CAF
CANCHE
CHL
CHN
CIVCMRCOG
COL
COM
CPV
CRICUB
CYPCZE
DEU
DJI
DNK
DOMDZA
ECUEGY
ESP
ETH
FIN
FJI
FRA
GAB
GBR
GHA
GIN
GMB
GNB
GNQ
GRC
GTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISR
ITA
JAMJOR
JPN
KENKHM
KOR
KWT
LAO
LBN
LKA
LSO
LUX
MAR
MDG
MEX
MLI
MLT
MMR
MNG
MOZ
MRT
MUS
MWI
MYS
NAM
NERNGA
NIC
NLDNOR
NPL
NZL OMN
PAK
PAN
PER
PHLPNG
POL
PRT
PRY
QAT
ROM
RUS
RWA
SAU
SDNSEN
SGP
SLE
SLV
SUR
SWE
SWZ
SYC
SYR
TCDTGO
THA
TTO
TUNTUR
TWN
TZA
UGA
URY
USA
VEN
VNM
YEM
ZAF
ZAR
ZMB
ZWE
50
e( lc
gdp9
5 | X
,dis
teq
) + b
*dis
teq
(f) Distance from Equator
Residuals Linear prediction
0 64
-1.75562
2.65895
GAB
UGA
ECU
RWA
KENSTP
SGP
CMR
BDI
GNQ
MYS
SYC
COG
COL
ZAR
CAF
CIV
SURGHA
IDN
GUYBEN
TZATGO
LKA
AGO
PAN
SLE
ETH
NGA
CRIGIN
PNG
TTO
VEN
GNB
KHM
DJICOM
MLI
NIC
BFATCD
PER
THA
BRB
MWI
SLV
NERVCT
GMB
GTM
SEN
PHL
CPV
HND
BRA
SDN
ZMBYEM
MMRBOL
BLZ
ZWE
LAO
MDG
MRT
HTI
DOM
FJI
JAM
MEXMUS
VNM
NAM
HKG
BGD
CUB
OMN
BWA
SAUQAT
MOZ
ZAF
BHS
PRY
TWN
SWZ
BHR
NPL
IND
KWT
EGY
LSO
JOR
ISR
PAK
LBN
CHL
MAR
SYR
URY
ARG
CYP
JPN
MLT
IRN
AUS
DZATUN
GRC
KORUSA
PRTTUR
CHN
ESP
ALB
ITA
NZLBGR
ROM
CANCHE
HUN
MNG
AUT
FRA
LUX
BELCZE
GBR
DEU
POL
NLD
IRL
RUS
DNKSWENOR
FIN
ISL
51
Lo
g R
ea
l GD
P p
er
cap
ita in
19
95
(d) Rule of Law
Log Real GDP per capita in 1995 Linear prediction
-2.08859 1.90945
5.77144
10.4544
AGO
ALB
ARG
AUSAUT
BDI
BEL
BENBFA
BGD
BGR
BHR
BHS
BLZ
BOL
BRA
BRB
BWA
CAF
CANCHE
CHL
CHN
CIVCMRCOG
COL
COM
CPV
CRICUB
CYPCZE
DEU
DJI
DNK
DOMDZA
ECU EGY
ESP
ETH
FIN
FJI
FRA
GAB
GBR
GHA
GIN
GMB
GNB
GNQ
GRC
GTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISR
ITA
JAMJOR
JPN
KEN KHM
KOR
KWT
LAO
LBN
LKA
LSO
LUX
MAR
MDG
MEX
MLI
MLT
MMR
MNG
MOZ
MRT
MUS
MWI
MYS
NAM
NERNGA
NIC
NLDNOR
NPL
NZLOMN
PAK
PAN
PER
PHLPNG
POL
PRT
PRY
QAT
ROM
RUS
RWA
SAU
SDNSEN
SGP
SLE
SLV
SUR
SWE
SWZ
SYC
SYR
TCDTGO
THA
TTO
TUNTUR
TWN
TZA
UGA
URY
USA
VEN
VNM
YEM
ZAF
ZAR
ZMB
ZWE
52distance from Brussels (miles)
growth since onset of reform Fitted values
448 4225
-.10982
.03399
CZE
SVN
SVK
HRV
HUN
POL
LVALTU
ALB
EST
BLR
MKD
BGR
ROM
MDA
UKR
RUS
GEO
ARM
AZE
TKM
UZB
TJK
KGZ
KAZ
MNG
53
54
55
Economic development = institutional change Since "institutions matter" is crucial to implement
institutional policies. Hence, the problem is to implement appropriate institutions that bring about economic development. Development is defined by institutional economists as a process of "institutional change and economic growth" (Toye 1995).
However, since institutions are "standardised behaviour patterns" then in order to change institutions those behavioural models must change, breaking off old rules, social norms and routines that impeded a development process before (Kuznets, 1965)
Kuznets says “The transformation of an underdeveloped in
developed country is not merely the mechanical addition of a stock physical capital: it is a thoroughgoing revolution in the patterns of life and a cardinal change in the relative powers and position of various groups in the population….The growth….must overcome the resistance of a whole and complex of established interest and values”. (1965, p.30):
Variety of trajectories of developmentFigure 1
Note: during the first period, from the origin to the point A, the speed of institutional
change is faster than the speed of economic growth. In the second period, from point
A to B, the economic growth is faster than the speed of the institutional change. In
other words, economic growth follows the institutional change.
Development path
Level of Institutional change
Economic growth
A B
institutional change (OIE)The institutional change is a slow process,
and it starts (because institutions are not longer efficient) when the technological or environmental conditions permit for such a change, or the aims of dominant groups support the change or still when power relations among the social groups change
4 paths of Institutional Changes (OIE):
1. Technology formal and informal change new behaviours and habits.
2. By design formal change new behaviours and habits informal change.
3. Change in the values new behaviours and habits informal change formal change.
4. Revolution formal change informal change.
Concluding remarksInstitution formation
VALUES ATTITUDES KNOWLEDGE BEHAVIOUR HABITS
INSTITUTIONS
Variety of institutionsThe economic institutions vary from country
to country, from the various social contexts and they do not have, generally, a model towards which they converge, in the sense that in some contexts some institutions can be present/useful/efficient in others not, and also where they are similar, it is not said that they carry out the same function or they have the same effects (North 1990).
Examples abound...
ExamplesAgents reactions to fiscal pressure in
Scandinavian countries and in Mediterranean countries
Agents reactions to public concessions (for taxi drivers, for shops, for corporation such as notary, layer, solicitors, etc)
Cooperation within Italian industrial districts
Adverse Selection within silicon valleyHidden agreements (i.e oil cartel etc)Italian dualism, which is an industrial,
institutional and behavioral dualism
Appropriate institutionsEvery country chooses the economic
institutions that thinks are more appropriated for the domestic context, considering the numerous differences that can exist within the same economic system (Rodrik 1999).
The Italian districts case is just an example and an interpretation of such a diversity of local governance, local development, and networking between economic agents.
Appropriate institutions (2)In the same way the phenomenon of the
Italian dualism between north and south shows that those same institutions do not have the same effect (Graziani 1998).
Appropriate institutions (3)Or still, the phenomenon of familiar
Capitalism in some countries of the south east Asian show, in other terms, another variety of capitalism dramatically affected by informal rules. (Hirschman, 1990)
Appropriate institutions (4)In Germany or other Asian countries such
South Korea and Japan there is a strong link between banks and the firms, a particular institutional framework and a particular partnership between state and market which have allowed the creation of a successful model of development specific with informal rules of those countries (Rodrik 1999).
Appropriate institutions (5)In LDCs strategies of "Imports Substitution"
(IS) or of “Exports Promotion" (EP), and all the connected institutions (subsidies to the exports, customs duties, aids of State, credits to the exports, etc) have been working in the same period, in the same countries but not in others although countries were in the same category of LDCs (Meier 2000).
Varieties of capitalism and welfare systems Characteristics Models (leader country)
Competition Economic Regulation
Main Economic Actors
Relationship between public and private actors
International Economic Relation
Taxation
Anglo-saxon model (USA, UK, Irland)
Promoting free competition
Deregulation, withdrawal of the State from the Economy
Firms, Corporations, Markets,
Residual public sector: Market- oriented
Global competition
Low taxes, no or little progressive rate
Corporatist model (Germany)
Balancing Cooperation and Competition
Decentralized Tripartite structures (business clubs, Trade unions, government)
Public-private partnerships
Protection of strategic sectors in an open economy
High taxation to finance Welfare State
Dirigiste model (France)
State Control, regulated competition
National Accumulation and Regulation Strategy
Private and Public sectors
Public-private partnerships under State guide
Protectionism High Taxes and Collective Recourses
Social Democratic model (Scandinavian countries)
State controlled liberalization and competition
Knowledge and innovation as economic guide for regulation
Public and Private Firms and Ethic Corporations
Public-private partnership in order to realize Social Cohesion
National Actors, moderate free competition, open economy
High wages, career perspective, High and progressive tax rate
Socialist markets (China, Vietnam)
Balancing between forms of liberalization and free competition
State Regulation and innovation
State or municipal owned firms, semi-private firms, private foreign firms. Public Authorities
Public and private actors with more emphasis on collective goals
National strategies in a global context, reasonably free trade
Distributive policies, collective services, equalitarian principles.